It seems like there's a lot of talk about what big investors are doing these days. I guess that's normal, but I'm seeing a new sense of urgency. It's as if everyone thinks knowing what these people are saying is more important than ever. Personally, I care less than ever about what they're saying. Every time someone tells me to go long or short, I relish the opportunity to ignore them...
The first person I'm ignoring is Bruce Berkowitz. Last week, Berkowitz bought another $30 million worth of AIG, the insurance company that tried to crash the global financial system by selling credit default swaps on all the crappy mortgages Wall Street was peddling.
I can find a few small, extremely well-capitalized community banks that seem too safe and cheap to ignore. But I'd never buy a big Wall Street bank. They're too complex for anyone to understand. How could any outside investor say he's long a Wall Street megabank with a straight face... when those same banks hire outside consultants to help figure out what they own and take a wild stab at what it might be worth?
That AIG is a giant insurance company only makes it harder to understand. With an insurance company, earnings are even more of a guess than with other types of businesses. Maybe AIG is different now. But I bet it's still too big and too complicated for most of us to follow.
After I finished ignoring Berkowitz's latest bet on yet another unfathomable financial institution, I found an opportunity to discount the wisdom of the biggest bond investor on Earth...
Since the second round of quantitative easing (QE2) was announced on November 3, municipal bonds have crashed (down about 6%), as measured by the iShares S&P National AMT-Free municipal bond fund (MUB). That's a huge short-term move for a normally stable asset.
But the world's leading bond investor is buying munis. Bill Gross, the man behind the biggest bond fund manager in the world (PIMCO), recently put $4.4 million of his own money into five PIMCO municipal bond funds, according to Business Insider. The investment about doubles Gross's personal position in municipal bonds, to approximately $8.9 million.
With $1.3 trillion under management, PIMCO isn't merely in the bond market. To a certain extent, it IS the bond market. Common sense would suggest whatever Bill Gross is buying will go up.
But I doubt this little muni bond position means much. According to Forbes.com, Gross' net worth is $2.1 billion. So he just put four hundredths of 1% of his net worth in municipal bonds. Big deal.
I wouldn't buy municipal bonds. Somehow, I just don't believe any government anywhere has the ability to allocate capital safely. You'd have to pay me 15% to buy muni bonds.
Gross is jumping the gun on municipal bonds. I think he'll feel like a sucker next year, when a major American city finally declares bankruptcy...
Detroit is that city... and the mayor's latest move is about as desperate as it gets. Detroit Mayor David Bing has decided to cut off basic services to 20% of the city. One-fifth of the Motor City will no longer get road repairs, streetlights, police patrols, or garbage collection. In other words, 20% of Detroit is now officially the private fiefdom of street gangs and homeless people. Mayor Bing is so despondent, he said the murder rate is falling because there's no one left to kill.
Detroit isn't the only major U.S. city in dire straights. Camden and Newark, New Jersey are both resorting to massive police layoffs to cut city budgets. The Financial Times reported, "unfunded liabilities are $14,000 per household in America's 50 largest cities... A National League of Cities survey reported 80 per cent of its members are laying off workers."
Bill Gross can put $9 million of his $2.1 billion in muni bonds. I'll stay away. In fact, as I said last week, I've been looking for a good way to short them.
In addition to Bruce Berkowitz and Bill Gross, I also actively ignore the hype surrounding JPMorgan Chase's silver trading activities. A group of investors alleges JPMorgan is keeping silver prices artificially low via a massive short position.
The Commodity Futures Trading Commission investigated in 2004 and again in 2008 and found nothing. Then, they took another look a few months ago. In October, CFTC commissioner Bart Chilton said, "I do believe there have been repeated attempts to influence prices in the silver markets" and "there have been fraudulent efforts to persuade and what I consider deviously control that price."
And now the rumor is that JPMorgan is reducing its silver position and will keep it small for the indefinite future.
JPMorgan isn't admitting anything. The bank said in a statement: "It is absolutely incorrect to say or imply that the NYMEX, CFTC, or any other exchange or regulator has instructed or asked us to reduce our position." JPMorgan wouldn't say whether it had reduced its position in the silver market.
Me? I bought some one ounce silver rounds last week. And I bought some more yesterday. I don't know or care what JPMorgan Chase is doing. But I do believe precious metals will protect my wealth against Federal Reserve inflation.
I've been buying gold coins for years. I've just decided within the last few months to add some silver to the mix. I don't buy bullion to speculate on someone else's position or even to bet on higher metals prices. I do it to get my money out of the broken U.S. financial system. I do it to save myself from another possible financial crash created by low interest rates and Fed money-printing. I do it because it's the right thing to do.
Incidentally, my coin shop isn't taking debit cards for bullion purchases anymore. The guys who run it expected the fees to come down, but that hasn't happened. So it's Johnny Cash or hit the road.
The only person I'm not ignoring is the guy staring back at me in the mirror every day. He tells me to buy silver and gold and hoard cash. He tells me to only buy the most deeply undervalued, highest-quality stocks and short overvalued and/or distressed companies.
In the current issue of Extreme Value, I've got a short sale recommendation I think will make us 30%-50% in the next six months. Its profit margins are contracting, and the world is in love with it. Its CEO was just on the cover of a major magazine accepting an award... and the stock is selling for more than 70 times earnings.
Extreme Value came out a week ago, and the short is already 8% in the money. I also have a long recommendation. It's one of the greatest, most successful businesses in the history of the world, but it's trading at only five times pretax earnings. The business could liquidate and you'd make money at current prices. If you want to get access to Extreme Value, including my latest long and short recommendations, click here.
What is the guy/gal in your mirror telling you to do with your money? Write us at feedback@stansberryresearch.com.
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"Every time you mention [Doug Casey's] name positively you lose more credibility. I lost tens of thousands of dollars buying his recommendations." – Paid-up subscriber Bob Wilber
Porter comment: Doug's been one of my best friends for more than a decade. And he's positively the smartest person I have ever met. He's given me plenty of very profitable ideas over the years... but nobody's perfect.
Ferris comment: The first money I ever made as an investor was by following Doug's advice, which I read in his book, Crisis Investing for the Rest of the '90s. I was actually waiting tables at the time. I saved up some cash and put it into what was then called United Services' World Gold Fund. It doubled in a year, and I was hooked.
I was a Doug Casey subscriber before I got into this business. In fact, without Doug, it's highly unlikely I would have gotten into this business at all. The choice between losing credibility with someone who doesn't get it and sticking up for someone who does get it is not a hard one for me to make.
"I purchased Paramount Gold in May 2009 and I sure am glad that I held on to it. Thanks to Mr. Sjuggerud and all you great analysts." – Paid-up subscriber MKL
"In today's digest, certainly you must mean short TLT or buy TBT, not 'short TBT.'" – Paid-up subscriber Bob Greene
Goldsmith comment: You're correct... I meant "buy" TBT, the UltraShort 20+ Year Treasury fund. The conclusion... We're going short government bonds or betting yields will go up. The fund is up 3.5% today, by the way.
Regards,
Dan Ferris
Medford, Oregon
December 14, 2010